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Today’s Class

• Introduction to supply chains

• Choosing right supply chain

• Challenges in efficient SCM


o Local vs. global optimization

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A Supply Chain

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

A supply chain is the system of organizations, people, activities, information and


resources involved in moving a product or service from supplier to customer.

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A Supply Chain

Supplier Manufacturer Distributor Retailer Customers

Material Flow
Cash Flow

Information Flow

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Complex Supply Network

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Match Supply Chain with Product
Share information? Produce In-house? …….
Vendor Management Outsource?
Inv?

Quick Response?
Low costs? Make to order?
Make to stock?

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What Products do You Sell?

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle
Profit Margin
Variety
Demand uncertainty
Stock-out rate
Markdown
Volume
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Product Life-Cycle

1955 1985 2015

2025 2035

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Product Life-Cycle

2013 Spring 2014 Spring

2015 Spring

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin
Variety
Demand uncertainty
Stock-out rate
Markdown
Volume
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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
Variety
Demand uncertainty
Stock-out rate
Markdown
Volume

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
Variety Low High
Demand uncertainty
Stock-out rate
Markdown
Volume
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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
Variety Low High
Demand uncertainty Low High
Stock-out rate
Markdown
Volume

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
Variety Low High
Demand uncertainty Low High
Stock-out rate Low High
Markdown
Volume

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
Variety Low High
Demand uncertainty Low High
Stock-out rate Low High
Markdown Low High
Volume

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Two Types of Products
Functional Innovative
(Soup) (Fashion)
Life Cycle Long Short
Profit Margin Low High
( Net Income / Net Sales (revenue))
Variety Low High
Demand uncertainty Low High
Stock-out rate Low High
Markdown Low High
Volume High Low

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Two Functions of Supply Chains
• Physical
o Transformation process!
o Converting raw materials to finished goods and moving them along the supply
chain

• Market Mediation
o Ensuring that the right variety of products are available at the right place, at
the right time, in the right quantities

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Two Types of Supply Chains
Efficient Responsive
Supply Chains Supply Chains
Cost minimization Revenue maximization
Focus
Full capacity utilization Offer high-margin variety

Cost Make, handle, move, hold: Lost sales, poor service:


Concern Tangible costs Opportunity costs

Operations § Small batches


§ Large batches
Strategy § Fast Design-to-Market time
§ Full truck load shipments
Execution § Postponed differentiation

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Appropriate Supply Chains

Functional Innovative

Efficient SC match mismatch


Common Error

Responsive SC mismatch match

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Efficient Frontier for Supply Chains
• Supply Chains face the same operational tradeoffs as single firms
High Variety

Trade-off

Improvement

Low Cost

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Product Life Cycle and Demand Characteristics
Functional Products Innovative Products

Purely Functional Established New Models of Entirely New


Products Products Existing Products Products

Produce Life
Long Short
Cycle
Demand
Low High
Uncertainly
Profit Margin
Low High

Product Value
Low High

Product
Low High
Variety

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Functional Products vs. Innovative Products

Lead time required for


Made-to-order products
Source: Fisher, “What is the right supply chain for your product?” Harvard Business Review, March-April 1997, 105-116.

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SCM—Challenges
Frequent Supply Inefficient Low order fill
shortages logistics rates

High
Tier 1 Manufacturer Distributor Retailer Customer stockouts
Supplier

Glitch-Wrong Material,
High inventories Ineffective High landed costs
Machine is Down –
through the chain promotions to the shelf
effect snowballs

Challenges Implications
Increasing demand and supply uncertainties Uncertainty drives need for flexibility
Shortening product and technology cycles Dynamic instead of static supply chains
Multiple outsourced supply chain partners Differential interests of multiple players

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Local and Sequential Optimization

• Every company makes decision based on its own interest

• Decisions, such as capacity & quantity, are made individually, rather


than collaboratively.

Sequential Optimization

Procurement Manufacturing Distribution Retail


Planning Planning Planning Planning

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Risk of Local View

I'm glad that the hole


is not on our side!

Video: Think Globally


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